Further interest rate cuts expected from the US Federal Reserve won't offer much help to Asian economies struggling to come to terms with the gloomy global environment, analysts said yesterday.
"I think the risk is that the interest rate cuts don't have much effect [in Asia]," said Rob Subbaraman, regional economist at Lehman Brothers in Tokyo.
After last week's devastating attacks on New York and Washington, the Fed is expected to cut rates aggressively to keep liquidity flowing in the financial markets and boost confidence.
Some economists were betting the Fed would ease as early as yesterday as US stocks resume trading for the first time since the Sept. 11 attacks that left thousands of people dead and Wall Street in tatters.
Certainly there was justification for more rate cuts even before the attacks.
"On a fundamental basis, all economists have now taken stock of what we've seen pre-Sept. 11 and, I think it is important to note, all of the signs were of the US tipping toward recession in the first place," David Fernandez, vice president at JP Morgan Chase, told Reuters Television.
JP Morgan is now forecasting the US economy will contract by one percent in the third quarter and 1.5 percent in the fourth. A further contraction in the first quarter of 2002 is quite possible.
US economic data released last week but compiled before the attacks showed the economy was still under severe pressure.
Industrial production fell for the eleventh straight month in August and a closely watched consumer sentiment survey taken in early September showed confidence fell to its lowest level in nearly eight years.
Retail sales rose a healthy 0.3 percent in August, helped by the US$38 billion in tax rebates mailed out starting in July. But few expect sales to stay so robust.
Consumer spending has been underpinning the US economy amid the economic slowdown and analysts fear the attacks and fears of further conflict will damage sentiment, pushing the country into recession.
Fernandez said he didn't believe the Fed was in a hurry to cut rates, but would ease the federal funds rate down to two percent by year end from 3.5 percent now.
The Fed has already cut interest rates seven times this year by a total of three percentage points.
Lehman Brothers' Subbaraman said his firm expects the Fed to cut rates by 50 basis points at its Oct. 2 policy meeting and possibly by another 25 basis points in November or December.
Subbaraman said Hong Kong would surely follow, while the cuts would provide further scope for easing in South Korea, Taiwan and the Philippines and possibly in Thailand and China.
Meanwhile in Japan, speculation is rife that the Bank of Japan will further loosen its already super easy policy when it holds its regular policy meeting on Thursday.
Whether the rate cuts actually help Asia's economies is more in doubt. The cuts could support fragile sentiment and improve liquidity but longer-term effects are likely to be muted.
"Interest rate cuts affect econ-omies mainly through bank lending and many of the countries in Asia still have very weak banking systems. So I think it is fair to say that the interest rate channel may not be as strong as it has been in the past," said Subbaraman.
Hong Kong is most affected by US interest rate policy due to its currency peg and because of the importance of interest rate sensitive real estate assets to the local economy. The US is also one of the territory's biggest export markets.
But even here, the impact is expected to be mild.
"Even if the reduction in rates helps people's mortgage burden, the fear of losing their jobs means that they won't spend more," said Daniel Chan, senior economist at Dao Heng Bank.
In Hong Kong, as in other Asian countries, the key in the short term will be how US share markets react when they re-open.
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